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Thursday, February 5, 2015

Saving For (Possibly) A Future House - Cash Or DG Stocks?

Eventually, I may have to buy a bigger house to accommodate a possibly larger family. Depending on how many children my wife and I have, we may need to move. If that's the case, I need to start saving up for a down payment. I could sell my current primary residence to come up with part of the funds for the down payment on the future house, but ideally, I want to be able to purchase the larger home and not have to sell my current place. That way, I could have two rental properties.

The problem is I don't know if we will need to move in the future or not. If I knew for certain that we didn't need to move, I would put more of my cash to work right now by investing it.

I've been contemplating different options:
1. Save up as much cash as possible to come up with the down payment.
2. Save up as much cash as possible and invest in stocks only when it is at a huge discount.
3. Invest consistently in dividend growth stocks to begin the compounding process and sell the stocks if and when it comes time to buy a larger home.

Here are the pros and cons of each:1. Save up as much cash as possible to come up with the down payment.

Pro: Absolutely no risk of losing money.

Con: I lose out on the dividend compounding if we end up not needing to move. I may also lose out on the possibility that these stocks may gain significantly over say 4-5 years.

2. Save up as much cash as possible and invest in stocks only when it is at a huge discount.

Pro: I can save up a large bulk of the down payment in cash and try to capitalize on the dividend growth stocks only when it is selling really cheap.

Con: Same as #1.

3. Invest consistently in dividend growth stocks to begin the compounding process and sell the stocks if and when it comes time to buy a larger home.

Pro: Maximize on the dividend compounding. Also, the stocks might grow significantly in value over 4-5 years.

Con: The stock market gets hit hard and I am unable to come up with the funds for the down payment on the larger house even if I sell my stocks.

I'm sure all of these plans are feasible. Worst case scenario I sell all my stocks, my rental property, and my primary residence. But that's not really helping my goal to retire early, is it? I'd be able to come up with the down payment on the bigger house, but then all my net worth would be tied to my home, which I don't think is very wise financially.

Ideally, I don't want to sell my rental property or my current primary residence to come up with the down payment. I don't mind selling some stocks to come up with the down payment, but I don't want to have to sell everything, especially if it's at a loss. If I ever had to sell a stock, I would only want to sell it at a gain, not at a loss.

I've really been juggling between option #2 and option #3. Dividend growth stocks usually perform better than most stocks when the stock market is down. The problem is if and when it comes time to come up with the down payment, will I be selling the stocks at a loss to come up with the funds? I'd really hate to have to sell my stocks at a loss. Again, key word being "if" I need to buy a larger home.

Since there's uncertainty in whether I need to buy a bigger home or not, I'm going to plan as if we will buy a bigger home. Better safe than sorry. As of right now, I think I'm going to go with option #2. I'll just have to accept the opportunity cost of losing out on more dividend compounding by having more cash reserve than I would like.

Does this mean I'm going to stop investing in dividend growth stocks completely until I buy my bigger home (if applicable)? ABSOLUTELY NOT! I'm still going to invest, but only a lot more selectively and with smaller amounts. I plan on purchasing stocks every month with Loyal3 to dollar cost average. I just probably won't be buying shares of stock every month in my brokerage account.

I hope I'm making the right decision... I believe this to be the best path to take for my family. Only time will tell.

2 comments:

That's a tough thing to balance ACI... My wife and I were fortunate to be in a position to save for a full 20% down payment in cash without interfering with some of our other investments. The real thing you've left out here is how long you think it will be until you need/desire the bigger place. Since 'eventually' is not really a set time frame, perhaps some targeted savings while investing the balance makes sense. Set a goal of a particular dollar amount over a course of several years. The more specific the goal, the easier it will be to adhere to it and accomplish it.

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